April 2010
Anticipations Monthly
o Our macroeconomic analysis Global economic activity has been solid since the beginning of the year. Asia is still largely behind this improvement but the other leading emerging countries are also making a significant contribution. Amongst Philippe Waechter the industrialized countries, the Chief Economist of Natixis United States has been much Asset Management more positively oriented since the beginning of 2010. In Europe, the signs have only become more positive since March. The surveys reflecting the latest soundings from companies suggest that industrial activity again returned to growth in March in most countries. An IMF survey carried out in 23 countries representing 75% of global GDP and based on a common methodology (GDP expressed as Purchasing Power Parity) revealed that 22 countries registered economic growth in March relative to February. Putting this into perspective and again according to this survey, no country had seen growth between November 2008 and February 2009. In the United States, the situation for companies continued to improve during the first quarter and their expectations are much more optimistic. This can be seen in the inventory rebuild and continued productive investment and via the improvement in the employment market statistics. These different elements are structuring the economic cycle. However, they have yet to spread to households in any significant way. The latter effectively remain cautious even if, in March, they seem to have recovered a renewed appetite for consumption with a pick-up in spending.
outstanding questions. The problem of household and government debt is going to be around for a long time to come, holding back medium-term growth. In Europe, the signals are less clear. In the surveys, companies indicate that their situation is improving but they are lagging the trend which is emerging in the United States. European companies have yet to resume investment and the employment situation is not showing any tangible signs of recovery. Against this backdrop, household consumption remains lack-lustre. This is explained, firstly, by the jobs market with the dramatic deterioration in Spain and Ireland. In France, it is due notably to the first quarter repercussions of the car scrappage scheme: while this incentive had driven rapid sales growth in late 2009, its partial unwinding has seen a significant reversal in this trend over the past few months. The positive factor in March was the growth in foreign orders which should underpin more rapid export growth and, thus, lead to a marked increase in production. These trends should subsequently be reflected in positive signs on investment and employment. In Asia, the impetus provided by China has driven growth in the region as a whole. A number of countries such as India, China and Australia have started to tighten monetary policy in response to this robust trend in the economic cycle.
The US economy is thus gradually establishing the building blocks of a cyclical recovery. There are, however, some
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Anticipations Monthly / April 2010
o Our market analysis
the same time, the impending general election in early May is clouding the picture.
n Money markets
l In the euro zone, the markets have priced in a risk differential. Faced with the turbulence likely to affect the euro zone, investors have focused on the German market. As a result, while there is no expectation of a shift in monetary policy, German yields have fallen significantly. This flight to quality was less marked for the assets of the other countries, even those with no particular risk. The French 10-year bond yield is thus a little above that of Germany. At the other end of the spectrum is Greece, for whom the risks are perceived to be high. However, the agreement signed in mid-April between the euro zone, the IMF and Greece should enable this difficult situation to be resolved.
The money market is dependent on the direction in monetary policy. This will not, however, change in the short term due to low inflation and little in the way of capacity strains. The modest inflation increase since the beginning of the year is linked to commodity prices. To date, as in 2008 and 2009, there has been no contagion from these energy and food price rises for the rest of the economy, nor for wages. As long as this configuration lasts, there will be no shift in monetary policy: central bank policy rates will thus remain low for another few months. The challenge for the central banks is to prepare those intervening in the money market for the unwinding of the exceptional measures implemented during the crisis. l At this level, the liquidity injected in the United States was necessary to reduce the vulnerability of the US banking system. It is, however, currently excessive and the Federal Reserve will implement a strategy aimed at mopping it up. This will take time. l In the euro zone, on the other hand, the situation is more straightforward. The ECB had more up-to-date methods for managing liquidity at its disposal (reflecting the relative youth of the European institution). It was thus able to inject liquidity and then gradually withdraw it based on a clearlyestablished calendar. The ECB’s stated aim is a return to normal functioning for monetary policy by late 2010. As of mid-October, this will be reflected in moves very close to Eonia and the refinancing rate as was the case prior to the crisis. The exceptional measures taken during this phase have seen a widening in the spread between the latter two indicators. This anomaly will be corrected during the second half of the year.
n Bond markets In the bond market, there have been a number of recent developments. l Firstly in the United States where expectations on monetary policy have changed fairly markedly and now mostly discount an increase. This has been reflected in long-term yields a little higher than at the beginning of the year. This change in expectations reflects the recovery in the US economy. l In the United Kingdom, yields have also ticked a little higher, the main reason being uncertainty about the economy. The central bank seems very unsure as to the measures to take to counter inflation which is slightly overshooting while economic activity remains weak. At
n Equity markets The equity market trend is being driven by the macroeconomic scenario which seeing a fairly significant improvement, by corporate earnings which are robust and by continued sometimes significant bouts of uncertainty. During the Greek crisis, this uncertainty came very much to the fore reflecting an ongoing degree of investor aversion for risky assets. The signature of the agreement has reduced this uncertainty prompting a significant rally in the markets.
n Currency markets In the currency market, the dollar has strengthened against the euro due to the uncertainties about the euro zone. This move in the green back should continue more rapidly than in Europe since US monetary policy should become less accommodative. The discussion of the month focused on the link between the Chinese renminbi and the dollar. The Americans see the Chinese currency as significantly undervalued. Any appreciation in the renminbi would be positive for the US economy. The Chinese government is more reluctant even if a stronger currency would ease strains on its own means of production. In addition to the level of the currency, the negotiations between the two countries also point to a new balance of power.
n Commodities There has been no easing of the strains in the commodities market. Food prices continue to rise, as do those of oil and industrial metals. We are again seeing the impact of the renewed demand from emerging countries.
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Anticipations Monthly / April 2010
o Our curent allocation preferences Risk categories
Risk subcategories
Tactical allocation*
Commentary
March 10 (1) April 10 (2)
Fixed income
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We remain ‘neutral’ on the bond market. The expected stability in monetary policies and the steepening in the yield curve are supportive.
Equities
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We remain ‘positive’. Earnings look well-oriented and there is less uncertainty.
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We remain ‘neutral’ in light of the Fed’s commitment to keeping interest rates low for a prolonged period.
Emerging markets
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Japan
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We remain ‘neutral’. The increase in deflationary pressures and the fragility of the recovery should lead the Bank of Japan to keep interest rates close to zero.
Corporate inv. grade
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+
We remain ‘positive’. The correction seen early in the year represents an investment opportunity. We continue to overweight financial issuers.
United States
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+
We remain ‘positive’. The underlying macroeconomic trend and corporate earnings remain supportive.
Euro-zone
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+
We remain ‘positive’. The factors favorable to the equity markets (improving earnings outlook, valuation levels) are still intact and should benefit the markets. We are increasing our preference for cyclical stocks.
UK
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We remain ‘neutral’.
Japan
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We remain ‘neutral’ due to the fragile nature of Japan's recovery. Moreover, the high level of the yen is penalizing export stocks.
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United States Euro-zone Fixed income
Euro issuers
Equities
currencies (against the euro)
UK
Dollar Yen Sterling
Commodities
Oil Gold
We remain ‘neutral’. With the inflation outlook low and the recovery expected to be fragile and moderate, the ECB is committed to leaving its policy rates at a low level. We remain ‘neutral’. The fragile recovery calls for monetary policy to remain unchanged. We remain ‘neutral’ overall but ‘positive’ on Latin America, ‘neutral’ on Central Europe and ‘negative’ on Asia.
We are ‘positive’. The dollar should benefit from expectations regarding monetary policy. ‘Neutral’: the yen should stabilize relative to the euro. ‘Negative’: fragility of sterling. We remain ‘neutral’. The oil price should remain in the USD75-80 range. We remain ‘neutral’. *weighting gap vs. strategic allocation of an investor
Scale from -- to ++ (1) Investment committee on 25/02/2010. (2) Investment committee on 25/03/2010.
Written on 22/04/2010
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